ADDENTAX GROUP CORP. The following discussion and analysis of our financial condition and results of operations for the three and nine months endedDecember 31, 2021 and 2020 should be read in conjunction with the Financial Statements and corresponding notes included in this Report on Form 10-Q. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations, and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors and Special Note Regarding Forward-Looking Statements in this report. We use words such as "anticipate," "estimate," "plan," "project," "continuing," "ongoing," "expect," "believe," "intend," "may," "will," "should," "could," "target", "forecast" and similar expressions to identify forward-looking statements. Overview Our Business We are a garment manufacturer and logistics services provider based inChina . We are listed on the OTCQB under the symbol of "ATXG". We classify our businesses into four segments: Garment manufacturing, Logistics services, Property management and subleasing, and Epidemic prevention supplies. Our garment manufacturing business consists of sales made principally to wholesaler located inthe People's Republic of China ("PRC"). We have our own manufacturing facilities, with sufficient production capacity and skilled workers on production lines to ensure that we meet our high quality control standards and timely delivery requirement for our customers. We conduct our garment manufacturing operations through five wholly owned subsidiaries, namelyDongguan Heng Sheng Wei Garments Co., Ltd ("HSW"),Shantou Chenghai Dai Tou Garments Co., Ltd ("DT"),Dongguan Yushang Clothing Co., Ltd ("YS"), andShantou Yi Bai Yi Garments Co., Ltd ("YBY") which are located in theGuangdong province,China . InOctober 2020 , the Company disposed of DT to a third party at fair value, which was also its carrying value as ofSeptember 30, 2020 . Our logistic business consists of delivery and courier services covering approximately 79 cities in approximately seven provinces and two municipalities inChina . Although we have our own motor vehicles and drivers, we currently outsource some of the business to our contractors. We believe outsourcing allows us to maximize our capacity and maintain flexibility while reducing capital expenditures and the costs of keeping drivers during slow seasons. We conduct our logistics services operations through four wholly owned subsidiaries, namelyShenzhen Xin Kuai Jie Transportation Co., Ltd ("XKJ"),Shenzhen Yingxi Peng Fa Logistic Co., Ltd. , which was incorporated inNovember 2020 , andShenzhen Hua Peng Fa Logistic Co., Ltd ("HPF"),Shenzhen Yingxi Tongda Logistic Co., Ltd ("TD"), which are located in theGuangdong province,China . InNovember 2020 , the Company disposed of HPF to a third party at fair value, which was also its carrying value as ofNovember 30, 2020 . The business operations, customers and suppliers of DT and HPF were retained by the Company; therefore, the disposition of the two subsidiaries did not qualify as discontinued operations. Our property management and subleasing provides shops subleasing and property management services for garment wholesalers and retailers in garment market. We conduct our property management and subleasing operation through a wholly owned subsidiary, namelyDongguan Yingxi Daying Commercial Co., Ltd ("DY"). Our epidemic prevention supplies business consists of manufacturing and distribution of epidemic prevention products and resale of epidemic prevention supplies purchased from third party in both domestic and overseas markets. We conduct our manufacturing of the epidemic prevention products inDongguan Yushang Clothing Co., Ltd ("YS"). We conduct the trading of epidemic prevention suppliers throughAddentax Group Corp. ("ATXG") andShenzhen Qianhai Yingxi Industrial Chain Services Co., Ltd ("YX"), a wholly owned subsidiary of the
Company. 3 Business Objectives
Garment Manufacturing Business
We believe the strength of our garment manufacturing business is mainly due to our consistent emphasis on exceptional quality and timely delivery of our products. The primary business objective for our garment manufacturing segment is to expand our customer base and improve our profit. Logistics Services Business The business objective and future plan for our logistics services segment is to establish an efficient logistic system and to build a nationwide delivery and courier network inChina . As ofDecember 31, 2021 , we provide logistics services to over 79 cities in approximately seven provinces and two municipalities. We expect to develop an additional 20 logistics points in existing serving cities and improve the Company's profit in the year end of 2022.
Property Management and Subleasing Business
The business objective of our property management and subleasing segment is to integrate resources in shopping mall, develop e-commerce bases and the Internet celebrity economy together to drive to increase the value of the stores in the area. The short-term goal for the year is to increase the occupancy rate of stores in the mall to more than 70%.
Epidemic Prevention Supplies Business
The primary objective of our epidemic prevention supplies business is to take the advantage of our resource in supply chain from the garment manufacturing business segment to facilitate and maximize the production, distribution and resale of epidemic prevention supplies, in order to increase our revenue base and improve our net profit. Seasonality of Business
Our business is affected by seasonal trends, with higher levels of garment sales in our second and third quarters and higher logistics services revenue in our third and fourth quarters. These trends primarily result from the timing of seasonal garment manufacturing shipments and holiday periods in the logistics services segment. Collection Policy
Garment manufacturing business
For our new customers, we generally require orders placed to be backed by advances or deposits. For our long-term and established customers with good payment track records, we generally provide payment terms between 30 to 180 days following their acknowledgement of receipt of goods.
Logistics services business
For logistics services, we generally receive payments from the customers between 30 to 90 days following the date of the registration of our receipt of packages.
Property management and subleasing business
For property management and subleasing business, we generally collect rental and management fees of the following month each month in advance.
Epidemic prevention supplies business
For Epidemic prevention supplies business, we generally receive payment from the customers within 30 days following the delivery of finished goods. We would also give our long-term customers with a 12 months long credit term policy to maintain a good business relationship. 4 Economic Uncertainty
Our business is dependent on consumer demand for our products and services. We believe that the significant uncertainty in the economy inChina has increased our clients' sensitivity to the cost of our products and services. We have experienced continued pricing pressure. If the economic environment becomes weak, the economic conditions could have a negative impact on our sales growth and operating margins, cash position and collection of accounts receivable. Additionally, business credit and liquidity have tightened inChina . Some of our suppliers and customers may face credit issues and could experience cash flow problems and other financial hardships. These factors currently have not had an impact on the timeliness of receivable collections from our customers. We cannot predict at this time how this situation will develop and whether accounts receivable may need to be allowed for or written off in the coming quarters. Despite the various risks and uncertainties associated with the current economy inChina , we believe our core strengths will continue to allow us to execute our strategy for long-term sustainable growth in revenue, net income and operating cash flow.
Summary of Critical Accounting Policies
We have identified critical accounting policies that, as a result of judgments, uncertainties, uniqueness and complexities of the underlying accounting standards and operation involved could result in material changes to our financial position or results of operations under different conditions or using different assumptions. Estimates and Assumptions We regularly evaluate the accounting estimates that we use to prepare our financial statements. In general, management's estimates are based on historical experience, on information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management. Revenue Recognition Revenue is generated through sale of goods and delivery services. Revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amount of revenue that is recorded reflects the consideration that the Company expects to receive in exchange for those goods and services. The Company applies the following five-step model in order to determine this amount: (i) identification of the promised goods and services in the contract;
determination of whether the promised goods and services are performance
(ii) obligations, including whether they are distinct in the context of the
contract;
(iii) measurement of the transaction price, including the constraint on variable
consideration;
(iv) allocation of the transaction price to the performance obligations; and
(v) recognition of revenue when (or as) the Company satisfies each performance
obligation.
5
The Company only applies the five-step model to contracts when it is probable
that the Company will collect the consideration it is entitled to in exchange
for the goods or services it transfers to the customer. Once a contract is
determined to be within the scope of ASC 606 at contract inception, the Company
reviews the contract to determine which performance obligations the Company must
deliver and which of these performance obligations are distinct. The Company
recognizes as revenues the amount of the transaction price that is allocated to
the respective performance obligation when the performance obligation is
satisfied or as it is satisfied. Generally, the Company's performance
obligations are transferred to customers at a point in time, typically upon
delivery.
For all reporting periods, the Company has not disclosed the value of unsatisfied performance obligations for all product and service revenue contracts with an original expected length of one year or less, which is an optional exemption that is permitted under the adopted rules.
Leases Lessee
The Company determines if an arrangement is a lease at inception. Operating
leases are included in operating lease right-of-use ("ROU") assets, other
current liabilities, and operating lease liabilities in our consolidated balance
sheets. Finance leases are included in property and equipment, other current
liabilities, and other long-term liabilities in the consolidated balance sheets.
ROU assets represent the right to use an underlying asset for the lease term and
lease liabilities represent the obligation to make lease payments arising from
the lease. Operating lease ROU assets and liabilities are recognized at
commencement date based on the present value of lease payments over the lease
term. As most of the leases do not provide an implicit rate, The Company
generally use the incremental borrowing rate based on the estimated rate of
interest for collateralized borrowing over a similar term of the lease payments
at commencement date. The operating lease ROU asset also includes any lease
payments made and excludes lease incentives. Lease expense for lease payments is
recognized on a straight-line basis over the lease term.
Lessor
As a lessor, the Company's leases are classified as operating leases under ASC 842. Leases, in which the Company is the lessor, are substantially all accounted for as operating leases and the lease components and non-lease components are accounted for separately. Rental income from operating leases is recognized on a straight line basis over the term of the relevant lease. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognized on a straight line basis
over the lease term.
Recently issued accounting pronouncements
InJune 2016 , the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. This standard requires a financial asset (or group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. This standard will be effective for the Company onApril 1, 2023 . The Company is currently evaluating the impact the adoption of this ASU will have on its consolidated financial statements.
The Company reviews new accounting standards as issued. Management has not identified any other new standards that it believes will have a significant impact on the Company's consolidated financial statements.
Results of Operations for the three months endedDecember 31, 2021 and 2020 The following tables summarize our results of operations for the three months endedDecember 31, 2021 and 2020. The table and the discussion below should be read in conjunction with our consolidated financial statements and the notes thereto appearing elsewhere in this report. Three Months Ended December 31, Changes in 2021 2021 2020 compared to 2020 (In U.S. dollars, except for percentages) Revenue$ 2,791,470 100.0 %$ 3,411,552 100 %$ (620,082 ) (18.2 )% Cost of revenues (2,323,716 ) (83.2 )% (2,950,124 ) (86.5 )% 626,408 21.2 % Gross profit (loss) 467,754 16.8 % 461,428 13.5 % 6,326 1.4 % Operating expenses (495,430 ) (17.8 )% (749,954 ) (22.0 )% 254,524 ) 33.9 % Loss from operations (27,676 ) (1.0 )% (288,526 ) (8.5 )% 260,850 90.4 % Other income, net 43,958 1.6 % 1,273 0.0 % 42,685 3,353.4 % Net finance cost (2,454 ) (0.1 )% (544 ) (0.0 )% 1,910 262.0 % Income tax expense (2,209 ) (0.1 )% (15,784 ) (0.4 )% 13,575 86.0 % Net income (loss)$ 11,619 0.4 %$ (303,581 ) (8.9 )%$ 315,200 103.8 % Revenue Total revenue for the three months endedDecember 31, 2021 decreased by approximately$0.6 million , or 18.2%, as compared with the three months endedDecember 31, 2020 . The significant decrease was mainly because of the decrease in garment manufacturing business offset by increases in logistics services business and property management and leasing business. Revenue generated from our garment manufacturing business contributed approximately$0.03 million (0.9%) and$2.3 million (67.1%) of total revenue for the three months endedDecember 31, 2021 and 2021, respectively. The decrease of$2.3 million was mainly due to factory re-decoration, remaining factories cannot provide as much capacity as before, we estimate the capacity will recover in early 2022. 6 Revenue generated from our logistics services business contributed approximately$1.7 million or 61.6% of our total revenue for the three months endedDecember 31, 2021 . Revenue generated from our logistic business contributed approximately$0.8 million or 24.2% of our total revenue for the three months endedDecember 31, 2020 . YXPF, the new subsidiary has developed the business to replace the business of HPF, which was disposed of inSeptember 2020 . Revenue generated from our property management and subleasing business contributed approximately$1.0 million or 37.5% of our total revenue for the three months endedDecember 31, 2021 . This is a new business segment developed in current period. Revenue of the segment contributed approximately$0.3 million , or 8.6% of our total revenue for the three months endedDecember 31, 2020 . There was no revenue generated from our epidemic prevention supplies business for the three months endedDecember 31, 2021 because no orders were obtained in the quarter. The Company accepted sales orders very cautiously to make sure the sales orders can be matched with stable suppliers to secure profitability of each order. Revenue generated from our epidemic prevention supplies business contributed approximately$0.01 million , or 0.1% of our total revenue for the three months endedDecember 31, 2020 . Cost of revenue Increase Three months ended December 31, (decrease) in 2021 compared 2021 2020 to 2020 (In U.S. dollars, except for percentages) Net revenue for garment manufacturing$ 25,641 100.0 %$ 2,287,981 100 %$ (2,262,340 ) (98.9 )% Raw materials 8,829 34.4 % 1,620,775 70.8 % (1,611,946 ) (99.5 )% Labor 12,783 49.9 % 467,478 20.5 % (454,695 ) (97.3 )% Other and Overhead 6,306 24.6 % 16,747 0.7 % (10,441 ) (62.3 )% Total cost of revenue for garment manufacturing 27,918 108.9 % 2,105,000 92.0 % (2,077,082 ) (98.7 )% Gross profit for garment manufacturing (2,277 ) (8.9 )% 182,981 8.0 % (185,258 ) (101.2 )% Net revenue for
logistics services 1,719,202 100.0 % 824,025
100.0 % 895,177 108.6 % Fuel, toll and other cost of logistics services 568,726 33.1 % 482,568 58.6 % 86,158 ) 17.9 % Subcontracting fees 842,510 49.0 % 85,766 10.4 % 756,744 882.3 % Total cost of revenue for
logistics services 1,411,236 82.1 % 568,334
69.0 % 842,902 148.3 % Gross Profit for logistics services 307,967 17.9 % 255,691 31.0 % 52,276 20.4 % Net revenue for property management
and subleasing 1,046,627 100.0 % 294,759
100.0 % 751,868 255.1 % Total cost of revenue for property management and subleasing 884,556 84.5 % 272,759 92.5 % 611,797 224.3 % Gross Profit for property management and subleasing 162,071 15.5 % 22,000 7.5 % 140,071 636.7 % Net revenue for epidemic prevention supplies $ -$ 4,786 100.0 % (4,786 ) (100.0 )% Merchandise/Finished goods/Raw materials 6 4,030 84.2 % (4,024 ) (99.9 )% Total cost of revenue for epidemic prevention supplies 6 4,030 84.2 % (4,024 ) (99.9 )% Gross (loss) income for epidemic prevention supplies (6 ) 756 15.8 % (762 ) (100.8 )% Total cost of revenue$ 2,323,716 83.2 %$ 2,950,123 86.5 %$ (626,407 ) (21.2 )% Gross profit$ 467,754 16.8 %$ 461,428 13.5 %$ 6,326 1.4 % 7
For our garment manufacturing business, we purchase the majority of our raw materials directly from numerous local fabric and accessories suppliers.
Raw material costs for our garment manufacturing business were 34.4% of our total garment manufacturing business revenue in the three months endedDecember 31, 2021 , compared with 70.8% in the three months endedDecember 31, 2020 . The decreased in percentages was mainly due to the purchase cost of the raw materials dropped.
Labor costs for our garment manufacturing business were 49.9% of our total
garment manufacturing business revenue in the three months ended
Overhead and other expenses for our garment manufacturing business accounted for 24.6% of our total garment business revenue for the three months endedDecember 31, 2021 , compared with 0.7% of total garment business revenue for the three months endedDecember 31, 2020 . For our logistic business, we outsource some of the business to our contractors. The Company relied on a few subcontractors, in which the subcontracting fees to our largest contractor represented approximately 29.9% and 10.4% of total cost of revenues for our service segment for the three months endedDecember 31, 2021 and 2020, respectively. The percentage increased as we used more subcontractors than our own logistics when COVID-19 epidemic was under controlled and aggregated subcontracting service to the largest supplier. We have not experienced any disputes with our subcontractor and we believe we maintain good relationships with our contract logistics services provider. Fuel, toll and other costs for our service business for the three months endedDecember 31, 2021 were approximately$0.6 million compared with$0.5 million for the three months endedDecember 31, 2020 . Fuel, toll and other costs for our service business accounted for 33.1% of our total service revenue for the three months endedDecember 31, 2021 , compared with 58.6% for the three months endedDecember 31, 2020 . The decrease in percentages was primarily attributable to decrease of use of our own logistics. Subcontracting fees for our service business for the three months endedDecember 31, 2021 increased 8.8 times to approximately$0.8 million from$0.1 million for the three months endedDecember 31, 2020 . Subcontracting fees accounted for 49.0% and 10.4% of our total service business revenue in the three months endedDecember 31, 2021 and 2020, respectively. The significant increase in percentages was primarily because the Company used more subcontractors when the epidemic was getting controlled. 8
For property management and subleasing business, the cost of revenue was mainly the amortization of operating lease assets for the subleasing business.
For epidemic prevention supplies business, we have trading and own production. The cost of revenue included cost of merchandise and cost of our own products. The other cost of the quarter represented depreciation of machinery. Gross profit Garment manufacturing business gross loss for the three months endedDecember 31, 2021 was approximately$0.002 million , or -8.9% of our total Garment manufacturing business revenue, as compared with gross profit of approximately$0.2 million , or 8.0% of our total Garment manufacturing business revenue for the three months endedDecember 31, 2020 . The gross margin was 16.9% lower due to higher raw material cost in the quarter endedDecember 31, 2021 . Gross profit in our logistics services business for the three months endedDecember 31, 2021 was approximately$0.3 million and gross margin was 17.9%. Gross profit in our logistics services business for the three months endedDecember 31, 2020 was approximately$0.3 million and gross margin was 31.0%. The decrease of gross profit ratio was mainly because of the increased cost of subcontractors in recent period. Gross profit in our property management and subleasing business for the three months endedDecember 31, 2021 was approximately$0.2 million , or 15.5% of our total property management and subleasing business revenue. Gross profit of the segment for the three months endedDecember 31, 2020 was approximately$0.02 million , or 7.5% of the revenue of the segment. Increase Three months ended December 31, (decrease) in 2021 compared 2021 2020 to 2020 (In U.S. dollars, except for percentages) Gross profit$ 467,754 100 %$ 461,428 100 % 6,326 1.4 % Operating expenses: Selling expenses (43,118 ) (9.2 )% (217,942 ) (47.2 )% 174,824 80.2 % General and administrative expenses (452,312 ) (96.7 )% (532,012 ) (115.3 )% 79,700 15.0 % Total$ (495,430 ) (105.9 )%$ (749,954 ) (162.5 )% 254,524 33.9 % Loss from operations$ (27,676 ) (5.9 )%$ (288,526 ) (62.5 )% 260,850 90.4 %
Selling, General and administrative expenses
Our selling expenses in our Garment manufacturing business segment for the three months endedDecember 31, 2021 and 2020 was approximately$0.001 million and$0.001 million , respectively. Our selling expenses in our logistics services segment was nil for the three months endedDecember 31, 2021 and 2020, respectively. Selling expenses in our property management and subleasing business was approximately$0.04 million and$0.02 million for the three months endedDecember 31, 2021 and 2020, respectively. Selling expenses in our epidemic prevention supplies segment was nil and approximately$0.2 million for the three months endedDecember 31, 2021 and 2020, respectively. Selling expenses consist primarily of advertisement, local transportation, unloading charges and product inspection charges. Total selling expenses for the three months endedDecember 31, 2021 decreased 80.2% to approximately$0.04 million from$0.2 million for the three months endedDecember 31, 2020 . It was mainly due to decrease of marketing expenses of epidemic prevention supplies business. Our general and administrative expenses in our Garment manufacturing business segment for the three months endedDecember 31, 2021 and 2020 was approximately$0.03 million and$0.08 million , respectively. Our general and administrative expenses in our logistics services segment, for the three months endedDecember 31, 2021 and 2020 was both approximately$0.2 million . The general and administrative expenses in our property management and subleasing business was approximately$0.1 million and$0.001 million for the three months endedDecember 31, 2021 and 2020, respectively. Our general and administrative expenses in our epidemic prevention supplies segment was nil and approximately$0.001 million for the three months endedDecember 31, 2021 and 2020, respectively. Our general and administrative expenses in our corporate office for the three months endedDecember 31, 2021 and 2020 was approximately$0.1 million and$0.2 million , respectively. General and administrative expenses consist primarily of administrative salaries, office expense, certain depreciation and amortization charges, repairs and maintenance, legal and professional fees, warehousing costs and other expenses that are not directly attributable to our revenues. 9 Total general and administrative expenses for the three months endedDecember 31, 2021 decreased by 15.0% to approximately$0.45 million from$0.53 million for the three months endedDecember 31, 2020 . Loss from operations
Loss from operations for the three months endedDecember 31, 2021 and 2020 was approximately$0.03 million and$0.3 million , respectively. Loss from operations of approximately$0.03 million and income of$0.1 million was attributed from our garment manufacturing segment for the three months endedDecember 31, 2021 and 2020, respectively. Income from operations of approximately$0.1 million and$0.06 million was attributed from our logistics services segment for the three months endedDecember 31, 2021 and 2020, respectively. Income from operations of approximately$0.01 million and$0.006 million was attributed from our newly developed property management and subleasing business for the three months endedDecember 31, 2021 and 2020, respectively. Income (loss) from operations of nil and approximately($0.2) million was attributed from our epidemic prevention supplies segment for the three months endedDecember 31, 2021 and 2020, respectively. We incurred a loss from operations in corporate office of approximately$0.1 million and$0.2 million for the three months endedDecember 31, 2021 and 2020, respectively. The loss from our corporate office was mainly due to increase in legal and professional fees to comply with theSEC accounting, disclosure and reporting requirements. Income Tax Expenses Income tax expense for the three months endedDecember 31, 2021 and 2020 was approximately$0.002 million and$0.016 million , respectively, 86.0% decrease compared to 2020. The Company operates in the PRC and files tax returns in
the PRC jurisdictions.
Yingxi HK was incorporated inHong Kong and is subject toHong Kong income tax at a progressive tax rate of 16.5%. No provision for income taxes inHong Kong has been made as Yingxi HK had no taxable income for the three months endedDecember 31, 2021 and 2020. QYTG and YX were incorporated in the PRC and is subject to the PRC Enterprise Income Tax (EIT) rate is 25%. No provision for income taxes in the PRC has been made as QYTG and YX had no taxable income for the three months endedDecember 31, 2021 and 2020. The Company is governed by the Income Tax Laws of the PRC. All Yingxi's operating companies are subject to progressive EIT rates from 5% to 15% in 2021. The preferential tax rates will be expired at end of year 2022 and the EIT
rate will be 25% from year 2023. The Company's parent entity,Addentax Group Corp. is aU.S entity and is subject tothe United States federal income tax. No provision for income taxes inthe United States has been made asAddentax Group Corp. had noUnited States taxable income for the three months endedDecember 31, 2021 and 2020. Net Income (Loss) We incurred a net income of approximately$0.01 million and a net loss of$0.3 million for the three months endedDecember 31, 2021 and 2020, respectively. Our basic and diluted earnings per share were$0.00 and ($0.01 ) for the three months endedDecember 31, 2021 and 2020, respectively. 10
Results of Operations for the nine months endedDecember 31, 2021 and 2020 The following tables summarize our results of operations for the nine months endedDecember 31, 2021 and 2020. The table and the discussion below should be read in conjunction with our consolidated financial statements and the notes thereto appearing elsewhere in this report. Nine months Ended December 31, Changes in 2021 2021 2020 compared to 2020 (In U.S. dollars, except for percentages) Revenue$ 9,835,733 100.0 %$ 21,014,064 100.0 %$ (11,178,331 ) (53.2 )% Cost of revenues (8,314,149 ) (84.5 )%
(22,776,087 ) (108.4 )% 14,461,938 63.5 % Gross profit (loss)
1,521,584 15.5 % (1,762,023 ) (8.4 )% 3,283,607 (186.4 )% Operating expenses
(1,510,823 ) (15.4 )% (1,830,992 ) (8.7 )% 320,169 17.5 % Income (loss) from operations
10,761 0.1 % (3,593,015 ) (17.1 )% 3,603,776 100.3 %
Other income, net 132,959 1.3 % 62,489 0.3 % 70,470 112.8 %
Net finance cost (3,240 ) (0.0 )% (6,484 ) 0.0 % 3,244 50.0 %
Income tax expense (17,893 ) (0.2 )% (23,196 ) (0.1 )% 5,303 ) 22.9 %
Net income (loss) $ 122,587 1.2 % $ (3,560,206 ) (16.9 )% $ 3,682,793 103.4 %
Revenue
Total revenue for the nine months ended December 31, 2021 decreased by
approximately $11.2 million , or 53.2%, as compared with the nine months ended
December 31, 2020 . The significant decrease was mainly because of the decrease
of epidemic supply business and garment manufacturing business offset by
increases in logistics services business and property management and leasing
business.
Revenue generated from our garment manufacturing business contributed
approximately $2.5 million (25.3%) and $5.2 million (24.7%) of total revenue for
the nine months ended December 31, 2021 and 2020, respectively. The decrease of
approximately $2.7 million mainly due to factory re-decoration which caused a
capacity decrease. We estimate the capacity will recover in the first quarter of
2022.
11
Revenue generated from our logistics services business contributed approximately
$4.1 million or 42.1% of our total revenue for the nine months ended December
31, 2021 . Revenue generated from our logistic business contributed approximately
$3.7 million or 17.4% of our total revenue for the nine months ended December
31, 2020 . The increase of $0.4 million was because YXPF, the new subsidiary was
developing the business to replace the business of HPF, which was disposedof inSeptember 2020 .
Revenue generated from our property management and subleasing business
contributed approximately
There was no revenue generated from our epidemic prevention supplies business for the nine months endedDecember 31, 2021 because no profitable orders were obtained in the period. The Company accepted sales orders very cautiously to make sure the sales orders can be matched with stable suppliers to secure profitability of each order. Revenue generated from our epidemic prevention supplies business contributed approximately$11.9 million , or 56.5% of our total revenue for the nine months endedDecember 31, 2020 . Cost of revenue Increase Nine months ended December 31, (decrease) in 2021 compared 2021 2020 to 2020 (In U.S. dollars, except for percentages) Net revenue for garment manufacturing$ 2,488,173 100.0 %$ 5,186,042 100.0 %$ (2,697,869 ) (52.0 )% Raw materials 1,719,420 69.1 % 3,709,275 71.5 % (1,989,855 ) (53.6 )% Labor 542,118 21.8 % 1,030,350 19.9 % (488,232 ) (47.4 )% Other and Overhead 23,124 0.9 % 30,918 0.6 % (7,794 ) (25.2 )% Total cost of revenue for garment manufacturing 2,284,662 91.8 %
4,770,543 92.0 % (2,485,881 ) (52.1 )% Gross profit for garment manufacturing
203,511 8.2 % 415,499 8.0 % (211,988 ) (51.0 )%
Net revenue for logistics services 4,144,604 100.0 %
3,664,409 100.0 % 480,195 13.1 % Fuel, toll and other cost of logistics services
1,410,231 34.0 % 1,367,753 37.3 % 42,478 3.1 %
Subcontracting fees 1,868,648 45.1 % 1,576,228 43.0 % 292,420 18.6 % Total cost of revenue for logistics services
3,278,879 79.1 % 2,943,981 80.3 % 334,898 11.4 % Gross Profit for logistics services
865,725 20.9 % 720,428 19.7 % 145,297 20.2 %
Net revenue for property management and subleasing 3,202,956 100.0 %
294,759 100 % 2,908,197 986.6 % Total cost of revenue for property management and subleasing
2,749,114 85.8 % 272,759 92.5 % 2,476,355 907.9 % Gross Profit for property management and subleasing
453,842 14.2 % 22,000 7.5 % 431,842 1,962.9 %
Net revenue for epidemic prevention supplies $ - $
11,868,854 100.0 % (11,868,854 ) (100.0 )% Merchandise/Finished goods/Raw materials
- 14,684,284 123.7 % (14,684,284 ) (100.0 )%
Labor - 64,946 0.5 % (64,946 ) (100.0 )%
Other and Overhead 1,494 39,574 0.3 % (38,080 ) (96.2 )% Total cost of revenue for epidemic prevention supplies
1,494 14,788,804 124.6 % (14,787,310 ) (100.0 )%
Gross loss for epidemic prevention
supplies (1,494 ) (2,919,950 ) (24.6 )% 2,918,456 (99.9 )%
Total cost of revenue $ 8,314,149 84.5 % $ 22,776,087 108.4 % $ (14,461,938 ) (63.5 )%
Gross profit $ 1,521,584 15.5 % $ (1,762,023 ) (8.4 )% $ 3,283,607 186.4 %
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For our garment manufacturing business, we purchase the majority of our raw materials directly from numerous local fabric and accessories suppliers.
Raw material costs for our garment manufacturing business were 69.1% of our total garment manufacturing business revenue in the nine months endedDecember 31, 2021 , compared with 71.5% in the nine months endedDecember 31, 2020 . The decreased in percentages was mainly due to the purchase cost of the raw materials dropped.
Labor costs for our garment manufacturing business were 21.8% of our total
garment manufacturing business revenue in the nine months ended
Overhead and other expenses for our garment manufacturing business accounted for 8.2% of our total garment business revenue for the nine months endedDecember 31, 2021 , compared with 8.0% of total garment business revenue for the nine months endedDecember 31, 2020 . For our logistic business, we outsource some of the business to our contractors. The Company relied on a few subcontractors, in which the subcontracting fees to our largest contractor represented approximately 30.3% and 43.0% of total cost of revenues for our service segment for the nine months endedDecember 31, 2021 and 2020, respectively. The percentage decreased as we used our own logistics more than the subcontractors under COVID-19 epidemic. We have not experienced any disputes with our subcontractor and we believe we maintain good relationships with our contract logistics services provider. Fuel, toll and other costs for our service business for the nine months endedDecember 31, 2021 were approximately$1.4 million compared with$1.4 million for the nine months endedDecember 31, 2020 . Fuel, toll and other costs for our service business accounted for 34.0% of our total service revenue for the nine months endedDecember 31, 2021 , compared with 37.3% for the nine months endedDecember 31, 2020 . Subcontracting fees for our service business for the nine months endedDecember 31, 2021 increased 18.6% to approximately$1.9 million from$1.6 million for the nine months endedDecember 31, 2020 . Subcontracting fees accounted for 45.1% and 43.0% of our total service business revenue in the nine months endedDecember 31, 2021 and 2020, respectively. 13
For property management and subleasing business, the cost of revenue was mainly the amortization of operating lease assets for the subleasing business.
For epidemic prevention supplies business, we have trading and own production. The cost of revenue included cost of merchandise and cost of our own products. The other cost of the quarter represented depreciation of machinery. Gross profit
Garment manufacturing business gross profit was approximately$0.2 million , accounted for 8.2% of our total Garment manufacturing business revenue for the nine months endedDecember 31, 2021 and approximately$0.4 million , accounted for 8.0% of our total Garment manufacturing business revenue for the nine months endedDecember 31, 2020 . The gross margin was 0.2% higher due to lower raw material cost in the months endedDecember 31, 2021 . Gross profit in our logistics services business for the nine months endedDecember 31, 2021 was approximately$0.9 million and accounted for 20.9% of our total Logistics services business revenue. Gross profit in our logistics services business for the nine months endedDecember 31, 2020 was approximately$0.7 million and accounted for 19.7% of our total Logistics services business revenue. The increase of gross profit ratio was mainly because of a decrease of operating expenses due to replacement of old vehicles and shifting our strategic focus on high margin customers. Gross profit in our property management and subleasing business for the nine months endedDecember 31, 2021 was approximately$0.5 million , or 14.2% of our total property management and subleasing business revenue. Gross profit in our property management and subleasing business for the nine months endedDecember 31, 2020 was$0.02 million , or 7.5% of our total property management and subleasing business revenue. Increase Nine months ended December 31, (decrease) in 2021 compared 2021 2020 to 2020 (In U.S. dollars, except for percentages) Gross profit$ 1,521,584 100 %$ (1,762,023 ) (100 )% 3,283,607 186.4 % Operating expenses: Selling expenses (135,310 ) (8.9 )% (376,975 ) (21.4 )% 241,665 64.1 % General and administrative expenses (1,375,513 ) (90.4 )% (1,454,017 ) (82.5 )% 78,504 ) 5.4 % Total$ (1,510,823 ) (99.3 )%$ (1,830,992 ) (103.9 )% 320,169 17.5 % Income from operations$ 10,761 (0.7 )%$ (3,593,015 ) (203.9 )% 3,603,776 100.3 %
Selling, General and administrative expenses
Our selling expenses in our Garment manufacturing business segment for the nine months endedDecember 31, 2021 and 2020 was$0.0003 million and approximately$0.003 million , respectively. Our selling expenses in our logistics services segment was nil for the nine months endedDecember 31, 2021 and 2020, respectively. Selling expenses in our property management and subleasing business was$0.1 million for the nine months endedDecember 31, 2021 . Selling expenses in our epidemic prevention supplies segment was nil and approximately$0.4 million for the nine months endedDecember 31, 2021 and 2020, respectively. Selling expenses consist primarily of advertisement, local transportation, unloading charges and product inspection charges. Total selling expenses for the nine months endedDecember 31, 2021 decreased 64.1% to$0.1 million from$0.4 million for the nine months endedDecember 31, 2020 . It was mainly due to decrease of marketing expenses of epidemic prevention supplies business. Our general and administrative expenses in our Garment manufacturing business segment for the nine months endedDecember 31, 2021 and 2020 was approximately$0.1 million and$0.2 million , respectively. Our general and administrative expenses in our logistics services segment, for the nine months endedDecember 31, 2021 and 2020 was approximately$0.7 million and$0.6 million . The general and administrative expenses in our property management and subleasing business was approximately$0.3 million and$0.001 million for the nine months endedDecember 31, 2021 and 2020, respectively. Our general and administrative expenses in our epidemic prevention supplies segment was nil and approximately$0.02 million for the nine months endedDecember 31, 2021 and 2020, respectively. Our general and administrative expenses in our corporate office for the nine months endedDecember 31, 2021 and 2020 was approximately$0.3 million and$0.6 million , respectively. General and administrative expenses consist primarily of administrative salaries, office expense, certain depreciation and amortization charges, repairs and maintenance, legal and professional fees, warehousing costs and other expenses that are not directly attributable to our revenues. 14
Total general and administrative expenses for the nine months ended
Income (loss) from operations
Income from operations for the nine months endedDecember 31, 2021 was approximately$0.01 million and loss from operations for the nine months endedDecember 31, 2020 was approximately$3.6 million . Income from operations of approximately$0.1 million and$0.2 million was attributed from our garment manufacturing segment for the nine months endedDecember 31, 2021 and 2020, respectively. Income from operations of approximately$0.2 million and$0.1 million was attributed from our logistics services segment for the nine months endedDecember 31, 2021 and 2020, respectively. Income from operations of approximately$0.05 million and$0.006 million was attributed from our property management and subleasing business for the nine months endedDecember 31, 2021 and 2020, respectively. Income (loss) from operations of nil and approximately($3.3) million was attributed from our epidemic prevention supplies segment for the nine months endedDecember 31, 2021 and 2020, respectively. We incurred a loss from operations in corporate office of approximately$0.3 million and$0.6 million for the nine months endedDecember 31, 2021 and 2020, respectively. The loss from our corporate office was mainly due to increase in legal and professional fees to comply with theSEC accounting, disclosure and reporting requirements. Income Tax Expenses
Income tax expense for the nine months endedDecember 10, 2021 and 2020 was approximately$0.018 million and$0.023 million , respectively, 22.9% decrease compared to 2020. The Company operates in the PRC and files tax returns in
the PRC jurisdictions.
Yingxi HK was incorporated inHong Kong and is subject toHong Kong income tax at a progressive tax rate of 16.5%. No provision for income taxes inHong Kong has been made as Yingxi HK had no taxable income for the nine months endedDecember 31, 2021 and 2020. QYTG and YX were incorporated in the PRC and is subject to the PRC Enterprise Income Tax (EIT) rate is 25%. No provision for income taxes in the PRC has been made as QYTG and YX had no taxable income for the nine months endedDecember 31, 2021 and 2020. The Company is governed by the Income Tax Laws of the PRC. All Yingxi's operating companies are subject to progressive EIT rates from 5% to 15% in 2021. The preferential tax rates will be expired at end of year 2022 and the EIT
rate will be 25% from year 2023. The Company's parent entity,Addentax Group Corp. is aU.S entity and is subject tothe United States federal income tax. No provision for income taxes inthe United States has been made asAddentax Group Corp. had noUnited States taxable income for the nine months endedDecember 31, 2021 and 2020. Net Income (Loss) We incurred a net income of approximately$0.1 million and a net loss of$3.6 million for the nine months endedDecember 31, 2021 and 2020, respectively. Our basic and diluted earnings per share were$0.00 and ($0.14 ) for the nine months endedDecember 31, 2021 and 2020, respectively. Summary of cash flows Summary cash flows information for the nine months endedDecember 31, 2021 and 2020 is as follow: Nine months ended December 31, 2021 2020 (In U.S. dollars) Net cash provided by (used in) operating activities$ 383,825 $ (3,782,116 ) Net cash used in investing activities $
(176,268 )
Net cash used in operating activities in the nine months endedDecember 31, 2021 was approximately$4.2 million more than that of the nine months endedDecember 31, 2020 . It was mainly because the net income of the nine months endedDecember 31, 2021 was approximately$0.1 million while it was a net loss of approximately$3.6 million for the nine months endedDecember 31, 2020 . The movement of operating assets and liabilities of the nine months endedDecember 31, 2021 resulted in cash inflow of approximately$0.1 million , while the movement of operating assets and liabilities of the nine months endedDecember 31, 2020 resulted in cash outflow of approximately$0.3 million . We will continue to improve our operating cash flow by closely monitoring the timely collection of accounts and other receivables. We generally do not hold any significant inventory for more than ninety days, as we typically manufacture upon customers' order. 15 Net cash used in investing activities for the nine months endedDecember 31, 2021 was approximately$0.9 million less than that of the nine months endedDecember 31, 2020 . It was mainly because the purchase of plant and equipment and other assets in the nine months endedDecember 31, 2021 was approximately$0.2 million less than the purchase of plant and equipment in the nine months endedDecember 31, 2020 . Moreover, there was a cash decrease of approximately$0.7 million due to disposal of two subsidiaries in the nine months endedDecember 31, 2020 . Net cash of financing activities for the nine months endedDecember 31, 2021 was approximately$6.2 million less than the nine months endedDecember 31, 2020 . It was mainly because there was proceeds of$3.7 million from issue of ordinary shares in the nine months endedDecember 31, 2020 ; the net repayment of related party borrowings in current period was approximately$2.6 million more than that of the nine months endedDecember 31, 2020 ; and there was repayment of bank borrowing of$0.1 million in the nine months endedDecember 31, 2020 .
Financial Condition, Liquidity and Capital Resources
As ofDecember 31, 2021 , we had cash on hand of approximately$0.5 million , total current assets of approximately$4.8 million and current liabilities of approximately$9.5 million . We presently finance our operations by using the cash flows borrowed from related parties and third parties. We aim to improve our operating cash flows and anticipate that cash flows from our operations and borrowings from related parties and third parties will continue to be our primary source of funds to finance our short-term cash needs. The Company's financial conditions raise substantial doubt about the Company's ability to continue as a going concern. The ability to continue as a going concern is dependent upon the Company's profit generating operations in the future and/or obtaining the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they become due. The Company expects to finance operations primarily through cash flow from revenue and capital contributions from the CEO. During the year, the CEO has provided financial support for the operations of the Company. In the event that the Company requires additional funding to finance the growth of the Company's current and expected future operations as well as to achieve our strategic objectives, the CEO has indicated the intent and ability to provide additional equity financing. The growth and development of our business will require a significant amount of additional working capital. We currently have limited financial resources and based on our current operating plan, we will need to raise additional capital in order to continue as a going concern. We currently do not have adequate cash to meet our short or long-term objectives. In the event additional capital is raised, it may have a dilutive effect on our existing stockholders. We are subject to all the substantial risks inherent in the development of a new business enterprise within an extremely competitive industry. Due to the absence of a long standing operating history and the emerging nature of the markets in which we compete, we anticipate operating losses until we can successfully implement our business strategy, which includes all associated revenue streams. Our revenue model is new and evolving, and we cannot be certain that it will be successful. The potential profitability of this business model is unproven. We may never ever achieve profitable operations. Our future operating results depend on many factors, including demand for our services, the level of competition, and the ability of our officers to manage our business and growth. As a result of the emerging nature of the market in which we compete, we may incur operating losses until such time as we can develop a substantial and stable revenue base. Additional development expenses may delay or negatively impact the ability of the Company to generate profits. Accordingly, we cannot assure you that our business model will be successful or that we can sustain revenue growth, achieve or sustain profitability, or continue as a going concern.
Foreign Currency Translation Risk
Our operations are located inChina , which may give rise to significant foreign currency risks from fluctuations and the degree of volatility in foreign exchange rates between theU.S. dollar and the Chinese Renminbi ("RMB"). All of our sales are in RMB. In the past years, RMB continued to appreciate against theU.S. dollar. As ofDecember 31, 2021 , the market foreign exchange rate wasRMB 6.355 toone U.S. dollar . Our financial statements are translated intoU.S. dollars using the closing rate method. The balance sheet items are translated intoU.S. dollars using the exchange rates at the respective balance sheet dates. The capital and various reserves are translated at historical exchange rates prevailing at the time of the transactions while income and expenses items are translated at the average exchange rate for the period. All translation adjustments are included in accumulated other comprehensive income in the statement of equity. The foreign currency translation loss for the nine months endedDecember 31, 2021 and 2020 was approximately$0.06 million and$0.2 million respectively.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements (as that term is defined in Item 303(a)(4)(ii) of Regulation S-K) as ofDecember 31, 2021 that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
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